SONISTA, INC. v. HSIEH

The opinion of the court was delivered by: RONALD WHYTE, District Judge

ORDER GRANTING IN PART AND DENYING IN PART CROSS-MOTIONS FOR
SUMMARY JUDGMENT

Plaintiff Sonista, Inc., and defendant Pixa, Inc., each move
for summary judgment. The motions relate to Sonista's trademark
infringement claims against all defendants and its breach of
fiduciary duty claims against defendant David Hsieh. For the
reasons below, the court grants Sonista's motion in part and
otherwise denies the motions.

I. BACKGROUND

The following facts are uncontroverted. In 2003, David Hsieh
was a director, shareholder, and officer of plaintiff Sonista,
Inc. During this time, he began setting up a company that
eventually became defendant Pixa, Inc. Hsieh negotiated the sale
of the mark DVONE from Sonista to defendant Techpac, Inc. Techpac was then (and still is) wholly owned by Mei-Hui Lee,
who is Hsieh's wife. Techpac licensed the DVONE mark to Pixa.
Hsieh resigned as an officer of Sonista in March 2004. In
September 2004, Sonista filed suit against Hsieh, Techpac, and
Pixa to recover the DVONE mark and damages for trademark
infringement and breach of fiduciary duty.

Currently before the court are cross-motions for summary
judgment. Sonista moves for summary judgment on its breach of
fiduciary duty claim against Hsieh and its infringement claims
against the defendants. Sonista also seeks summary adjudication
that Hsieh's breach of fiduciary duty and the defendants'
infringement were all willful. Pixa moves for summary
adjudication that it is protected from infringement as a bona
fide purchaser. Obviously, these motions cannot be all granted
in their entireties.

II. ANALYSIS

A. Summary judgment

Summary judgment is proper when the pleadings, discovery, and
affidavits show that there is "no genuine issue as to any
material fact and that the moving party is entitled to judgment
as a matter of law." FRCivP 56(c). Material facts are those which
may affect the outcome of the case. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact
is genuine if there is sufficient evidence for a reasonable jury
to return a verdict for the non-moving party. Id. A party
moving for summary judgment who does not have the ultimate burden
of persuasion at trial has the initial burden of producing
evidence negating an essential element of the non-moving party's
claims or showing that the non-moving party does not have enough
evidence of an essential element to carry its ultimate burden of
persuasion at trial. Nissan Fire & Marine Ins. Co. v. Fritz
Cos., 210 F.3d 1099, 1102 (9th Cir. 2000).

B. Breach of fiduciary duty

To prove a claim for breach of fiduciary duty, a party must
show "(1) existence of a fiduciary duty; (2) breach of the
fiduciary duty; and (3) damage proximately caused by the breach."
Stanley v. Richmond, 35 Cal. App. 4th 1070, 1086 (1995).
Sonista is a corporation created under the laws of California.
California law requires a director to generally perform his
corporate duties "in good faith, in a manner such director
believes to be in the best interests of the corporation and its
shareholders and with such care, including reasonable inquiry, as
an ordinarily prudent person in a like position would use under
similar circumstances." Cal. Corp. Code § 309(a). A director who
adheres to this standard "shall have no liability based upon any alleged failure to discharge the
person's obligations as a director," id. § 309(c); this is
California's codification of the business judgment rule.

A different standard applies to transactions in which a
director has an interest other than his corporation's interest. A
transaction "in which one or more . . . directors [have] a
material financial interest" can be ratified by the corporation
in one of three ways: (1) The interested director discloses all
material facts to the shareholders, and the disinterested
shareholders approve the transaction; (2) the interested director
discloses all material facts to the board or appropriate
committee of the board, and the disinterested members of the
board or appropriate committee approve the transaction and the
transaction "is just and reasonable as to the corporation at the
time it is authorized;" or (3) "the person asserting the validity
of the contract or transaction sustains the burden of proving
that the contract or transaction was just and reasonable as to
the corporation at the time it was authorized, approved or
ratified." Id. § 310(a).

1. Transfer of the DVONE mark

It is not disputed that Hsieh was a director at the time of the
DVONE mark transfer. Hsieh, as a director of Sonista, had a duty
of "good faith" and had to act "in the best interests of the
corporation and its shareholders." Id. § 309(a). The first
element of a claim for breach of fiduciary duty, the existence of
a duty, has been proven by uncontradicted evidence.

Lee is the sole shareholder of Techpac, which was incorporated
during Lee and Hsieh's marriage. Under California community
property law, the stock, which was acquired during marriage, is
presumptively community property. See In re Marriage of Haines,
33 Cal. App. 4th 277, 291 (1995); Cal. Fam. Code § 760. Hsieh
therefore owns half of the Techpac stock, and has a substantial
interest in Techpac. See Cal. Fam. Code § 751 ("The respective
interests of the husband and wife in community property during
continuance of the marriage relation are present, existing, and
equal interests."); d'Elia v. d'Elia, 58 Cal. App. 4th 415, 423
("When stock is community property, each spouse has an equal
interest in it, regardless of who is the holder of record."). The
transfer of the DVONE mark from Sonista to to Techpac was a transaction in which Hsieh had a "material financial interest."
The business judgment rule of § 309 thus cannot protect
Hsieh;*fn1 the transaction is instead scrutinized using §
310.

There is no evidence that Hsieh's transfer of the DVONE mark
was ratified by either disinterested directors or shareholders;
there are declarations that the transfer was unauthorized. See
2d Hallam Decl. in Supp. of Prelim. Inj. ¶¶ 2-3 (stating that
Hsieh was never authorized to sell Sonista's intellectual
property assets and Sonista's board of directors never approved
the sale of the DVONE mark); Liou Decl. in Supp. of Prelim. Inj.
¶¶ 5-6 (same). Hsieh's declaration does not create an issue of
material fact regarding § 310(a)(1) or (2). Hsieh stated that his
"superiors at Eastech were demanding that [he] begin selling
Sonista assets" in 2003. Hsieh Decl. in Opp'n to Mot. for Prelim.
Inj. ¶ 4. If this is true and the directive covered the DVONE
mark, he could have disposed of the DVONE mark in a sale to any
entity in which he lacked a material interest, and this court
would have analyzed the transaction using the business judgment
rule. Hsieh, though, chose to sell the mark to Techpac, which his
wife owned, making the sale one in which he had a material
interest. Hsieh cannot claim the protections of § 310(a)(1) or
(2).

Hsieh's only escape from a breach of fiduciary duty for the
DVONE mark transfer is to "prov[e] that the contract or
transaction was just and reasonable as to the corporation at the
time it was authorized, approved or ratified." See Cal. Corp.
Code § 310(a)(3). Hsieh has produced no admissible evidence that
this was the case aside from his declaration that he "believe[s]
that the price paid by Techpac was fair and reasonable under the
circumstances." Hsieh Decl. in Opp'n to Mot. for Prelim. Inj. ¶
4. In its motion for summary judgment, Sonista alleges that it
"has sold over $1,000,000 worth of products" under the DVONE mark
but points to no evidence that supports the allegation. Sonista's
Mot. for Summ. J. at 8. This court cannot say as a matter of law
that the $1,000 price for the DVONE mark was not "just and
reasonable" to Sonista given the disputed factual allegations as
to the state of Sonista's business in 2003 and 2004 and the fact that Sonista has produced no evidence to
counter Hsieh's declaration. Summary adjudication that Hsieh
breached a duty to Sonista is thus inappropriate.

The parties have both submitted expert reports regarding
damages. As one might expect, each expert report favors the party
or parties hiring that expert. Sonista's expert, Drew Voth,
asserts that Sonista's damages are "in excess of $1.9 million."
Voth Decl. in Supp. of Sonista's Mot. for Summ. J. ("Voth Decl.")
¶ 4, while Pixa and Techpac's expert, Stephen Degnan, claims that
Sonista's expert "has not established with any reasonable
probability that Sonista, Inc. has lost profits in excess of $1.9
million or in any amount," Degnan Decl. in Supp. of Opp'n to
Sonista's Mot. for Summ. J. ¶ 4. (These expert declarations have
been provided to the court, but the underlying reports do not
appear to have been.) The corporate defendants claim there is a
disputed issue of material fact regarding damages, making summary
judgment inappropriate.

Technically, Sonista has produced evidence of damages, while
the corporate defendants have produced a declaration that
Sonista's evidence is speculative, but no actual evidence of
Sonista's damages or lack thereof. The Degnan declaration
contains statements more akin to legal conclusions than factual
findings. It is insufficient "for the nonmovant simply to attack
the credibility of the movant's affiants without a supporting
factual showing." William W. Schwarzer et al, The Analysis and
Decision of Summary Judgment Motions: A Monograph on Rule 56 of
the Federal Rules of Civil Procedure 47 (1991). The court need
not decide, though, whether the defendants' expert's declaration
constitutes evidence sufficient to prevent summary judgment.

Sonista has not produced evidence that compels the conclusion
that the transfer of the DVONE mark caused Sonista any damage. In
his declaration, Voth stated that "Sonista has sustained
quantifiable damage as a result of David Hsieh's breaches of
fiduciary duty and also as a result of Defendants' trademark
infringement in an amount in excess of $1.9 million." Voth Decl.
¶ 4. Voth did not specify how much (if any) of this amount was
due to Hsieh's breaches and how much (if any) was due to the
defendants' infringement. Since the Voth declaration does not
provide any estimate of the damages Hsieh caused by transferring
the DVONE mark to Techpac, there is no evidence of the damages
this particular action caused Sonista. It would therefore be
inappropriate for the court to grant Sonista summary judgment on
this element of its cause of action for breach of fiduciary duty. The court will grant Sonista summary adjudication as to the
first element of its breach-of-fiduciary-duty claim against
Hsieh, that Hsieh owed Sonista a duty. The issue of damages and
whether Hsieh can prove the transfer was "just and reasonable" to
Sonista cannot be resolved on Sonista's motion for summary
judgment.

2. Creation of Pixa

As discussed above, the parties do not dispute that Hsieh was a
director of Sonista in 2003 and 2004. As above, the first element
of a claim for breach of fiduciary duty, the existence of a duty
Hsieh owed Sonista, has been adequately shown.

The court must decide if the steps Hsieh took assisting in the
creation of Pixa are, as a matter of law, a breach of his
fiduciary duties to Sonista, and if this breach is shown by
uncontested evidence. Sonista offers the declaration of Pixa CEO
David Wu for the proposition that Sonista and Pixa are
competitors. Wu admitted that both companies were in the
"consumer electronics" industry, but declined to describe them as
rivals or not rivals and stated that he did not know if they
shared any customers. Stewart Decl. in Supp. of Sonista's Mot.
for Summ. J., Ex. 11 (Wu Decl.) at 37:5-23. At a time when all
three defendants were represented by the same counsel, the
defendants described Sonista and Pixa as rivals. See Opp'n to
Sonista's Mot. to Compel at 9:10-11 ("The filing of a lawsuit
does not constitute catre blanche access to a rival's innermost
workings. Yet that is exactly what Sonista seeks to obtain from
Pixa here."). Pixa and Sonista both sold DVONE-branded products,
albeit at different times. Hsieh has offered no evidence that
Pixa and Sonista are not rivals, and the court will therefore
consider the companies rivals.

Assisting in the creation of a rival to Sonista while still a
Sonista director and officer would be a clear-cut violation of
Hsieh's fiduciary duties to Sonista. Sonista offers the following information to support its contention that Hsieh worked to
incorporate Pixa before he resigned his position as an officer of
Sonista in March 2004:

1. Pixa's articles of incorporation list Hsieh's home
address as the address of Pixa's principal executive
office and all officers and directors. Stewart Decl.
in Supp. of Sonista's Mot. for Summ. J., Ex. 5 at 1.

2. Hsieh sent an e-mail suggesting the name "Pixa" on
August 5, 2003. Krone Decl., Ex. 4.

3. On September 4, 2003, Hsieh sent an e-mail message
with a list of to-do items, including "Pixa need to
be up and running at Oct-01,2003," "TP/Pixa agreement
first draft," "DVOne logo status at US/European," and
"2004 CES show." Krone decl., Ex. 6.

4. Hsieh sent an e-mail message from his Sonista
e-mail address to Jack Peng stating "we just send out
the status of you though our AOL account, Be nice
please tempory not send the e-mail to this account,
you know I will get kill !!!" Id., Ex. 7.

6. Hsieh e-mailed Xavier Unamun in October 2003 about
a logo for Pixa. Id., Ex. 9. Unaman e-mailed Hsieh
the final version of the Pixa logo a month later.
Id., Ex. 14.

7. On November 3, 2003, Ted Moshos e-mailed Hsieh
regarding a meeting with Cynthia Chan, a "DVD buyer."
Id., Ex. 10 at 1. Moshos stated that "I didn't send
her the company profile because it says SONISTA and I
didn't know if that's what you want. Please send her
the correct information that you want her to see."
Id. Hsieh responded that he would "figure out how
to present it." Id.

9. Around November 17, 2003, Hsieh changed the
signature block of his Sonista e-mail account,
listing his company as "Pixa Inc." instead of
"Sonista Inc.," as it had been formerly. Compare
id., Ex. 12, with id., Ex. 11.

10. On November 17, 2003, Hsieh sent from his Sonista
e-mail address an e-mail with the subject line "DvOne
new contact phone #." Krone Decl., Ex. 13. This
e-mail was addressed to several addresses at the domain
"ephog.de" and contained a postal address and several
phone numbers for "Pixa, Inc." Id.

11. On November 20, 2003, Dell Inc. sent Hsieh an
e-mail confirming an order for a computer, which Dell
was to bill to Hsieh at "Pixa Inc" at his home
address and ship to Hsieh at Pixa's business address.
Id., Ex. 15 at 1.

12. On December 2, 2003, Hsieh e-mailed Unamun a
profile of Pixa that was based on Sonista's profile.
Compare id., Ex. 17, with id., Ex. 16.

13. On December 2, 2003, Nancy Tam e-mailed Hsieh a
suggested plan of action for "generating awareness
among retailers and media about the PIXA and DVONE
brands and products" at the January 2004 Consumer
Electronics Show. Krone Decl., Ex. 18.

Hsieh offers no evidence that contradicts the above items, which
are largely based upon e-mails recovered by Sonista's forensic
computer expert, Winston Krone, from Hsieh's Sonista laptop.
Hsieh merely argues that "the mere presence of these e-mails on
the hard drive of the computer cannot establish that any material
fact is undisputed." This is true, but Hsieh's failure to present
any contradictory evidence leaves this e-mail evidence
uncontroverted. There is no dispute of material fact that Hsieh
worked to help set up Pixa while he was still a director and
officer of Sonista.

Hsieh argues that his higher-ups had undertaken restructuring
that would eliminate or redirect Sonista and that he was
instructed to sell off corporate assets, but this could not make
it in Sonista's best interest for Hsieh to work to set up
Pixa.*fn2 Hsieh's fiduciary duty as an officer continued
until he resigned in March 2004, and his fiduciary duty as a
director continues to this day. Regarding the creation of Pixa,
there is no dispute of material fact as to the second element of
a claim for breach of fiduciary duty, the breach of a duty Hsieh
owed Sonista.

The only evidence of Sonista's damages arising from the
creation of Pixa is contained in the parties' conflicting expert
witness declarations. As above, the issue of damages cannot be
resolved on a motion for summary judgment because the Voth declaration is not specific
enough; it does not compel the conclusion that Sonista suffered
any damage from Hsieh's actions to set up Pixa.

The court will grant Sonista summary adjudication as to the
first two elements of its breach-of-fiduciary-duty claim against
Hsieh for his hand in Pixa's creation: the existence and breach
of a duty. The issue of damages cannot be resolved on Sonista's
motion for summary judgment.

3. Willfulness

Sonista seeks summary adjudication that Hsieh's breaches of
fiduciary duty were willful. Willfulness is a legal term of art
and has different meanings in different settings. Sonista's
motion does not indicate the context in which it seeks to have
Hsieh's conduct ruled willful. The only law Sonista offers
supporting its case for willfulness is a district court case from
the Northern District of Illinois. Sonista has not shown that it
is entitled as a matter of law to a declaration that Hsieh's
breach of fiduciary duty was willful, and this portion of
Sonista's motion will therefore be denied.

C. Trademark infringement

Sonista moves for summary judgment that the defendants
infringed the DVONE mark,*fn3 but Sonista does not specify
which of the three defendants have infringed the mark. As the
three defendants would have very different bases of liability for
any infringement of the DVONE mark, it would be difficult for
this court to rule that Sonista had shown that it was entitled to
judgment as a matter of law. Sonista mainly analyzes the
likelihood of confusion under the Sleekcraft factors (from AMF
Inc. v. Sleekcraft Boats, 599 F.2d 341, 348-49 (9th Cir. 1979)).
Also, as Hsieh points out, Sonista's complaint contains claims
for trademark infringement under sections 32(1) and 43(a)(1)(A)
of the Lanham Act and California Business and Professions Code §
14335, yet Sonista's motion for summary judgment does not specify
on which of these causes of action Sonista seeks summary
judgment. (The reasonable assumption is that Sonista seeks
summary judgment on its cause of action under section 32(1) of
the Lanham Act.)

Sonista's motion, though, is flawed for another reason: Sonista
has jumped the gun. To assert a claim for trademark infringement,
a plaintiff must own or have exclusive rights to the mark. The
Lanham Act "grants standing to assert a claim for trademark infringement
solely to the `registrant.'" Berni v. Int'l Gourmet Rests. of
Am., Inc., 838 F.2d 642, 645-46 (2d Cir. 1988) (citing
15 U.S.C. § 1114(1)). The term "registrant" includes the registrant and his
"`legal representatives, predecessors, successors and assigns.'"
Id. (quoting 15 U.S.C. § 1127). Sonista has not addressed this
issue.

The ownership of the DVONE mark is still an open question;
Sonista in its complaint admitted that Hsieh transferred the
mark, Compl. ¶ 76, and Sonista seeks to void that transfer, id.
¶ 85. Sonista has produced a copy of its federal registration of
the DVONE mark, see 2d Stewart Decl. in Support of Sonista's
Mot. for Summ. J., Ex. 2, and evidence that Sonista was still the
owner of record on September 26, 2005, id., Ex. 6. The
corporate defendants have produced the assignment agreement
between Sonista and Techpac and evidence that the assignment was
recorded at the U.S. Patent and Trademark Office. See Evid. in
Supp. of Pixa's Mot. for Summ. J., Exs. 1-3. When granting
Sonista's motion for a preliminary injunction, the court stated
that "the court is convinced there is a strong possibility that
the transfer of the DVONE mark to Techpac is invalid and
voidable, making Sonista the owner of the mark." Sonista, though,
has neglected to follow up on this matter; presumably, Techpac is
still the legal owner of the mark (though unable to make use of
it.) A ruling on infringement by any defendant would be premature
because it is not clear that Sonista is entitled to such a ruling
as a matter of law.

Since the court will deny Sonista's motion for summary judgment
on its infringement claims, the court will also deny the portion
of its motion seeking a declaration that the infringement was
willful. The court also notes that it has the same concerns about
the vagueness of this request that it did regarding Sonista's
request to declare Hsieh's breaches of fiduciary duty
willful.*fn4

D. Pixa's status as a bona fide purchaser

Pixa moves for an order declaring it protected from Sonista's
infringement claims because Pixa, as a licensee of the DVONE mark
from Techpac, was a "bona fide purchaser." As Sonista correctly
points out, none of the cases Pixa relies on in its motion
support the proposition that a licensee can be protected as a
bona fide purchaser. Pixa only licensed  it did not purchase 
rights to the DVONE mark from Techpac. Pixa claims it is protected by California Civil Code section
3543, which states that "[w]here one of two innocent persons must
suffer by the act of a third, he, by whose negligence it
happened, must be the sufferer." There is evidence that the
actions of Hsieh, who was instrumental in setting up Pixa, can be
imputed to Pixa. Pixa is not clearly an innocent party here. Pixa
has not shown that it is entitled to judgment as a matter of law,
and its motion will be denied.

III. ORDER

For the foregoing reasons, the court grants Sonista's motion
for summary judgment as follows:

1. Sonista is entitled to summary adjudication that
Hsieh owed it a fiduciary duty;

2. Sonista is entitled to summary adjudication that
Hsieh breached his fiduciary duties to Sonista by
working to set up Pixa.

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